Stock Market Reactions to Conflict Diamond Trading Restrictions and Controversies

In this paper, I explore the reactions of financial market participants to news relating to the Kimberley Process Certification Scheme (KPCS), a body that regulates aspects of global diamond production and trade. I use an event study approach with data on the returns for shares of leading global mining and jewelry retail companies over the period from 1999 to 2011. I show that the most influential dates related to the KPCS for diamond mining companies were associated with regulatory actions in the early 2000s taken by the United Nations and the United States. These events were associated with lower returns for diamond mining companies. After 2004, jewelry companies experienced abnormal returns coinciding with KPCS-related events, while mining firms appear rarely affected by events during this time. The majority of returns for jewelry companies were negative for events which called into question the ability of the KPCS to ensure conflict-free diamond production and trade. Expanded legal diamond production in some cases coincided with positive returns for jewelry retail companies over the time period I consider. These results are consistent with the expectation that jewelry companies, which often market directly to consumers, are more sensitive to public perception concerning the KPCS and its credibility. The results are inconsistent with the point of view that the creation of the KPCS was seen by financial market participants as “good news” overall for diamond mining companies. The results also suggest that once trade restrictions were in place, mining companies were less affected by controversies surrounding the credibility of the KPCS.